Outlook for Investment Markets
At the moment, the consensus view is that both the global and local economies will gradually pull out of the COVID-19-induced recession, but it will be a long and slow haul, with ongoing risk of relapse. Given the ongoing uncertainty, extensive diversification and other defensive portfolio insurance will be central to good outcomes.
New Zealand Cash & Fixed Interest
There have been no policy updates from the Reserve Bank of New Zealand, or RBNZ, with the next review on 23 September and the next full-scale policy statement on 11 November. In the interim, short-term interest rates have shown little change, with the 90-day bank bill yield continuing to trade close to 0.3%. Longer-term yields have fallen further: at time of writing the yield on the two-year government bond is marginally negative (at negative 0.06%). The yield on the benchmark 10-year bond is 0.6%, and is down by over 1% since the start of the year. Formally, the New Zealand dollar is down 2.2% in overall value year to date, though it has been very much a game of two halves. The kiwi dollar dropped by 10.9% in the period of global financial volatility earlier this year, but has risen by 9.7% since its low point on March 19. Much of the rise happened early on, and the kiwi has shown little net change since early June.
New Zealand Property
Listed property has had a difficult year and continues to lag behind the performance of the wider sharemarket. On a total return basis (including dividends) the S&P/NZX All Real Estate index year to date has delivered a loss of 4.0% compared with the 2.6% return from the S&P/NZX50 index. The reasons for property's underperformance are straightforward: a combination of largely COVID-19-related cyclical shocks have hit the retail and office subsectors, accelerating some structural challenges both sectors (particularly retail) were facing in any event, and the relatively robust performance of the industrial subsector has not been enough to offset the other sectors’ issues.
Australian & International Property
It has been the same story for the A-REITs, with listed property being one of the worse equity subsectors. In terms of total return the S&P/ASX 200 A-REITs index year to date has recorded a loss of 16.9% compared with the 9.6% loss from the S&P/ASX 200 index.
The same pattern has been repeated overseas. The FTSE EPRA/NAREIT Global index in U.S. dollars has delivered a loss of 17.0%, a very large underperformance compared with the 3.6% total return from the MSCI World index. There has been little change to the regional outcomes: all major markets went backwards, though the eurozone did better than most (down 9.4%) while the U.K. (down 25.6%) and emerging markets (down 21.2%) fared worst.
The same combination is at work in Australia as in New Zealand: weak cyclical retail conditions and a stronger longer-term challenge from online shopping, plus changes to the world of office work, have outweighed the ongoing strength of demand for industrial property.
Global Infrastructure
The effects of COVID-19 have weighed as heavily on global infrastructure as they have on listed property, Year to date the S&P Global Infrastructure index in U.S. dollars has lost 17.8% in capital value and has lost 16.2% including the taxed value of dividends. Hedging back into New Zealand dollars modestly widened the loss to 18.6% in New Zealand dollar terms.
The asset class continues to experience the same issues as global property: while there are parts of the asset class that are doing very well through COVID-19, such as the infrastructure to support data traffic and remote working, the adverse impact on the patronage-dependent sectors like airports and motorways has dominated the outcome. It has not helped that the energy-related subsectors like pipelines have been hit by a lower world oil price (down some 40% since the start of this year), and that the defensively-oriented utilities have been out of favour in a world where investors have been keener on growth sectors like tech.
Australasian Equities
Despite repeated attacks by hackers unsuccessfully trying to blackmail the New Zealand Stock Exchange, the market has kept going, but investment outcomes have been modest: prices have drifted down in recent weeks, likely because of reimposed restrictions after the Auckland COVID cases. Year to date the S&P/NZX50 index is up by 1.0% in capital value, and up by 2.6% including the value of dividends. For much of the year all the running was made by the big names in the S&P/NZX10, and it is still the best performing part of the market (up 6.6%), but the small caps have started to do rather better than before (now marginally up, by 0.2%). The mid-caps, however, remain out of favour, and are down by 6.4%.
Renewed COVID outbreaks have also weighed on the Australian market, where again prices have drifted lower in recent weeks. Year to date the S&P/ASX 200 index is down 11.7% in capital value (9.6% after allowing for the value of dividends). The weak financial sector (ex the A-REITs, down 23.6%) has been the biggest headwind, but the industrials (down 17.8%) have also done poorly. The stronger IT sector (up 18.1% year to date, despite the global IT sell-off in September) and a decent performance from the miners (up 6.0%) have not been enough of a counterbalance to the weakness elsewhere.
International Fixed Interest
Yields from global bonds continue to be pitiful: the yield on the J.P. Morgan Global Government Bond index is only 0.54%, and in some markets (notably Germany and Switzerland) the yield is negative (negative 0.36% in Germany, for example). But yields moving lower this ear, particularly in the U.S. and the U.K., mean that bond investors have enjoyed capital gains, and the asset class has continued to provide portfolio capital protection. Year to date the Bloomberg Barclays Global Aggregate index in U.S. dollars is up 6.1%. The strongest sub-sector by far has been long-dated U.S. Treasuries, where the long maturity amplifies the capital gain: year to date the Bloomberg Barclays Long Treasury index is up 22.1%.
The big event of the past month was the Fed’s review of how it plans to go about running monetary policy in future. The main points were that both U.S. employment and U.S. inflation risked turning out too low; that there was room to push harder against unemployment given that pushing unemployment down did not appear to risk sparking off too-high inflation; and that periods when inflation has been too low (as it has been in both the U.S. and elsewhere) would need to be balanced with periods when it will be a bit too high, if on average the target rate of 2% is going to be hit over the longer term.
International Equities
The good news is that, towards the end of August, world shares, as measured by the MSCI World index of developed markets in U.S. dollars, had made back all the COVID-19 losses and had narrowly gone past their pre-COVID peak: on 2 September the index closed 2.4% above its previous peak set in February. The bad news is at that point, the previously hot market for tech stocks, which had been making a disproportionate contribution to overall market gains, suffered a sharp relapse. The New York Stock Exchange publishes an index called the FANG+ which tracks the collective performance of 10 of the tech giants, and between 2 September and 8 September, it slumped by 13.6%. A partial tech recovery more recently has helped world shares back into slightly positive territory for the year. The MSCI World index in U.S. dollars is up 1.6% year to date, with a further small foreign exchange gain for New Zealand investors due to the 0.7% decline of the kiwi dollar against the U.S. dollar. The U.S. continues to do the heavy lifting, with the S&P500 index up 4.7% and the tech-oriented Nasdaq up 23.2%: ex the U.S. the MSCI World is down 6.2%, with European markets (other than Germany) doing especially badly. Emerging markets are up 2.6% on the MSCI index, but again performance is heavily attributable to one market (China) which has offset large losses in Brazil, India and Russia.
The extent of the COVID-19 setback to the world economy has become somewhat clearer. At time of writing, for the 35 OECD-member economies that have reported June quarter GDP data, the average quarter on quarter decline was a 10.6% fall in output. The simple average was exaggerated by some very large falls indeed, notably the U.K.’s 20.4% decline, but even the median fall of 9.1% represented a severe shock to the global economy.
That was then, and the world has moved on, with more recent indicators showing that world business activity has recovered from the initial lockdowns and other COVID impacts. Infection rates have eased in some countries, restrictions have been loosened, and pent-up demand has boosted companies’ revenue. The J.P. Morgan Global Composite indicator of world business activity for August found, "Expansions have been signalled in each of the past two months, following a five-month sequence of contraction."
It has helped that China, the economy that first ran into serious COVID trouble, is coming out the other side in decent shape. The Caixin China General Composite index, one of the indexes that feed into the J.P Morgan overall global index, was strong in August. Caixin commented that "the recovery of the manufacturing and services sectors from the epidemic remained the main theme of the economy. Supply and demand both expanded. The gauges for orders, purchases and inventories all remained strong." Since the Caixin survey was published, other data have confirmed the upturn, notably August’s retail sales.
While this is all positive, there are still a number of risks and uncertainties which make the investment outlook problematic. One is that the improved levels of economic activity have not lifted all boats equally. The J.P. Morgan data, broken down by sector, show that while most industries are growing again, activity levels are still falling in the tourism, recreation and transportation sectors, and little respite is likely in the near term. There are also likely to be some ongoing adverse impacts even as the shorter-term business cycle improves. As noted earlier in the property sections, for example, the old world of the commute to the job in the office has likely changed, and while there are winners from the process (Zoom being the outstanding example), there is an ecosystem of businesses linked to the old pre-COVID ways of doing things that are going to find the going difficult.
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